SEC sets out plans for stress testing US asset managers

The Securities and Exchange Commission (SEC) has proposed stress tests for the asset management industry and voiced concerns over the use of derivatives.

The chairwoman of the SEC, Mary Jo White, set out a series of regulatory and risk reporting recommendations for asset managers in a conference speech yesterday (December 11).

She said that the SEC is developing a recommendation to require investment advisers to create “transition plans to prepare for a major disruption in their business”.

Article continues after advert

Ms White said: “Stress testing is an important tool routinely used by banking regulators. Implementing this new mandate in asset management, while relatively novel, will help market participants and the Commission better understand the potential impact of stress events.

“Building on what we have learned about stress testing through money market reform, the staff is evaluating what protocols would be appropriate for investment advisers and investment companies.”

The chair of the SEC, who was speaking at a New York Times conference in New York, also revealed that liquidity management and the use of derivatives in mutual funds and exchange traded funds (ETFs) are under scrutiny.

Ms White claimed that the use of derivatives by funds has risen in recent years and that many funds are using derivatives in “increasingly complex ways”.

She acknowledged that funds often use derivatives to manage risks or to adjust exposure to a market or sector, but Ms White also suggested that these instruments can create risks for funds.

“At the most basic level, the staff is considering whether broad risk management programs should be required for mutual funds and ETFs to address the risks related to their liquidity and derivatives use, as well as measures to ensure the Commission’s comprehensive oversight of those programs,” she said.

Ms White added: “The staff is also reviewing options for specific requirements, such as updated liquidity standards, disclosures of liquidity risks, or measures to appropriately limit the leverage created by a fund’s use of derivatives.”